Weaker Chinese PMI data

The BoJ’s Tankan index of sentiment in respect of large manufacturers fell in the 3rd Q to -3, from -1, the 4th consecutive negative reading. Sentiment worsened and the outlook remained cautious. The Nikkei declined by -0.8% to a 3 week low, having declined by over 4.0% in the 3rd Q. The continuing spat with China over ownership of certain islands in the S China seas, combined with the global economic slowdown is adding to the country’s woes;

Taiwanese September manufacturing PMI (a good indicator of global demand) came in at 45.6, below the 50 dividing line for the 4th consecutive month;

South Korean exports (one of the world’s largest exporters) declined by -1.8% in September Y/Y, the 7th decline this year. Exports to the EU dropped by -5.1%. The central bank is expected to cut interest rates this month as it reduces its 2012 growth forecast;

Chinese manufacturing PMI declined to 47.9 in September, from 47.6 in August and the 11th consecutive monthly decline, according to HSBC/Markit. Export orders declined at the fastest rate in 42 months, whilst purchasing activity fell for the 5th consecutive month. Input and output prices continued to decline and businesses shed labour for the 7th consecutive month.

The official Chinese PMI index rose to 49.8 in September, higher than August’s 49.2, though the 2nd month below 50 and below the forecast of 50.1. The new orders component rose to 49.8, from 48.7 in August, whilst exports rose to 48.8 from 46.6. Inventories declined to 47.9, from 48.2. The data suggest that Chinese GDP will have declined to between +7.2% to +7.3% Y/Y in the 3rd Q, down from +7.6% in Q2. The data is not effectively seasonally adjusted and whilst the headline number shows improvement, the reality may well be different;

India’s manufacturing PMI came in at 52.8 in September, similar to August’s reading, according to HSBC. New orders rose marginally. Exports declined by -9.7% in August (better than the -14.8% in July), with imports lower by -5.1% (better than the -7.6% in July), resulting in a trade deficit of US$16bn. However, exports account for a smaller percentage of GDP than is the case of other countries in Asia;

In the EZ, September manufacturing PMI data was as follows:

Ireland 51.8, up from 50.9 and the 7th successive monthly rise.

Spain 44.6, up from 44.1, the highest reading since February.

Italy 45.7, up from 43.6 in August, much better than forecasts of around 44.1 and the highest since March.

Holland, up to 50.7, from 49.7 in August.

Germany final PMI, 47.4, up from 44.7.

France final PMI came in at 42.7, slightly higher than the flash reading of 42.6 and a 41 month low.

EZ final PMI came in at 46.1, slightly higher than the flash reading of 46.0 and up from 45.1 in August;

The Troika are back in Athens. The Greek budget reports that GDP will decline by -6.1% this year, -4.0% next, though is forecast to have a primary surplus of +1.1% this year;

Germany wants the Greece to receive the next (E31.5bn) tranche of aid. There are reports that Germany wants Greece to remain in the EZ for fear of contagion and are pushing the Troika to ensure that their report allows the EZ to continue to fund Greece. A report is expected on the 22nd October. The recently appointed leader of Germany’s opposition party, the SPD, Mr Steinbruck (he was the only credible candidate, in reality) favours a continued rescue of Greece, though repeats that they have to meet their commitments – Greece meet its commitments – come now Mr Steinbruck. However, Mr Steinbruck may well be an important player in due course. At the next election, Mrs Merkel may well be forced into a “grand coalition” with the SPD, which will result in her remaining as Chancellor and Mr Steinbruck taking over as Finance Minister from Mr Schaeuble. The IMF want Greece to restructure its debts. There is no doubt that another restructuring will prove necessary. This charade has long past its sell by date;

The Spanish authorities have finally admitted that the 2013 budget deficit will come in higher than forecast at 7.3%, above the target of 6.3%. They allege that if it were not for aid to their banks, the deficit would have met the 6.3% target. In addition they raised (for the 2nd time) the 2011 budget deficit target to 9.44% of GDP, from 8.96% previously reported. Last Friday, the Spanish authorities claimed that their banks would need just E40bn, as opposed to the E54bn reported by an US consultancy. These are all mickey mouse numbers – most of the Spanish banks are insolvent and have not provided anywhere near enough, particularly in respect of their property exposure. Finally, debt to GDP is set to rise to 85.3% this year and 90.5% next – the government has forecast that its budget deficit will contract to 4.5% next year and 2.8% in 2014, as it reduces its deficit by E37bn – complete pie in the sky forecasts. Spain is currently in negotiations with Moody’s to avoid a further downgrade. Finally, the Spanish region of Catalonia is threatening to break away – far fetched in my view, as it will not be accepted in the EZ. However, they could demand more financial benefits from the central authorities – a serious possibility;

France’s budget last week was similar to that of Spain’s in that its forecasts for economic growth are wildly optimistic. France proposes to cut discretionary spending by 2.0% of GDP next year, to reduce its budget deficit to 3.0% of GDP. At present, state spending is around 55% of GDP. The problems in France increase. At present, exports declined to 17% of total EZ exports resulting in a trade balance which was a surplus of +2.5% in 1999, to a deficit of -2.4%. With debt to GDP in excess of 90%. The most recent manufacturing PMI data came in at a shocking 42.6, the lowest since April 2009. A key leading indicator of money supply (6 month real M1 money) is contracting even faster than in Spain. The recent budget increased taxes on the “wealthy”, with the ratio of taxes to gross wages rising to 46.3% and have been front loaded, whilst expenditure cuts have been back loaded. Just 39.7% of those aged between 55 and 64 work (57.7% in Germany and 56.6% in the UK, for comparison purposes), due to early retirement provisions introduced by French governments. I can go on and on, but you get the picture. Essentially, France remains the biggest threat to the EZ,as I keep banging on\ (Source Telegraph);

Just to underscore the problems in the EZ, the August unemployment rate came in at 11.4%, though in line with estimates and the same as July’s;

UK September manufacturing PMI came in at 48.4, lower than August’s 49.6, slightly worse than expectations of 49.0. Output fell and employment declined, though, alarmingly, input prices surged to 57.5 in September to 48.8 in August, though output prices were subdued;

Fitch confirmed the UK’s AAA credit rating, citing a flexible economy, political stability and strong institutions. Great, but the chances of the UK retaining its AAA rating look numbered, though should not have a material impact when it happens;

US September manufacturing PMI came in at 51.5, in line with expectations and August’s number;

The WTO has forecast that global volume of trade in goods would rise by just +2.5% this year, down from +5.0% last year and +14.0% in 2010. Still seems too high to me. Global trade expanded by +6.0% over the last 2 decades;

The Xstrata/Glencore saga has finally ended. Xstrata recommended the revised and increased offer by Glencore. However, some investors (Threadneedle for example) remain opposed. The Xstrata board has decided to allow shareholders to vote on 2 packages in respect of the offer, one which includes a provision to pay Sterling 140mn to senior executives as a retention bonus and one that does not. Whilst some shareholders remain opposed, the merger looks as if it will go ahead;


Asian markets (ex Japan) closed mainly higher, though a number are on holiday. European markets are much firmer, reflecting better PMI data from the peripheral EZ countries – the Italian MIB is up over 2.0%. US futures suggest a higher open, following on from better Asian and European markets. In addition, the beginning of each Q are generally better for markets. The Euro is firmer at US$1.2925. Gold is up at US$1788, with Brent (November) at US$113.

In spite of the bad news, I remain of the view that you cant fight central banks and, as a result, remain net long. Still remain short the Euro. The Australian central bank, the RBA meets this week – expectations are that they will cut rates. I remain short the A$. The BoJ, ECB, and the BoE also meet, but no change is expected.

The US earnings season will be upon us imminently – expect weaker to cautious outlook statements.

The 1st of the US Presidential debates starts this week – should be interesting.

In New York for the next 2 weeks. Looks great as usual.

Kiron Sarkar

1st October 2012

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